Enhanced Charitable Lead Annuity Trust (eCLAT)

What is a CLAT?

A Charitable Lead Annuity Trust (CLAT) is a split-interest trust that is designed to pay a fixed and determinable benefit to a charitable organization for either a specific number of years or for the life of the donor. 

What is an eCLAT? 

Instead of structuring the annual annuity payments to charity so that they are moderate and level throughout the entire term of the CLAT, the annual annuity payments under an eCLAT begin relatively low and level where they remain up until the final year of the CLAT (the year of death of the grantor) when the final payment is substantially larger and designed to produce a present value for the entire stream of payments that is equal to the amount of the CLAT contribution. At the end of the term, whatever remains in the CLAT after the final payment to charity is distributed to the grantor's family, or to other non-charitable beneficiaries. Because the charitable payment schedule looks a bit like a shark's fin when depicted on a graph, this strategy is sometimes called a Shark-Fin CLAT.

Benefits

To GRANTOR:

• Current year income tax deduction
• No use of estate tax exemption
• No gift tax implications
• Creates a source for estate tax liquidity
• Provides gift to charity
• Provides additional economic benefits to heirs

To CHARITY: 

• Annual annuity payments for lifetime of grantor
• Life insurance proceeds provide predictable and certain lump sum benefit to charity at grantor’s death

To HEIRS:

• All assets in excess of the amount distributable to charity pass to heirs entirely free of gift tax, estate tax, or income tax
• Proceeds from life insurance policy that are not needed to make final distribution to charity provide estate tax liquidity
• Income tax deduction generates additional wealth that can be passed to heirs

The Ideal Client

• Has a taxable estate
• Has charitable intent
• Needs to create estate tax liquidity
• Ideal one-time donation $1M+

An eCLAT is the only strategy available where it is possible for one to give money to charity and still have more dollars ultimately pass to their family than would have passed had they not given money to charity!

How Does an eCLAT Work?

An Example: A hypothetical 59-year-old client wishes to donate two million dollars to his alma mater at death. Utilizing the eCLAT strategy, the client contributes $1M to an eCLAT, which uses $100K to purchase long-term municipal-bonds that generate $4K per year for distribution to the charity. The remaining $900K goes into a uniquely designed cash accumulation life insurance policy. The client receives an immediate income tax deduction of $1M, generating tax savings of $370K that can be placed in a side account to invest at his discretion. At his death, $2.16M goes to the University, and $2.52M* will be distributed to his heirs. The side account (projected to grow at 4.5% after income tax), after being subjected to estate tax, can provide an additional sum for heirs.

* Based on projected life insurance policy performance